Gold stumbles but long-term prospects bright

The global metals sell-off in the first week of May caused temporary panic among fund managers and investors, who in the space of less than 24 hours began to question whether the global bull market for commodities like gold had fallen flat.

The appeal of gold as a safe-haven asset had resulted in a stellar run for the precious metal this year as investors used the commodity as protection against currency fluctuations and inflation.

Yet after touching a record $US1577 an ounce on May 2, capping a price rise for the precious metal of 23 per cent this year, gold fell by nearly 5 per cent in the following week to below $US1500 an ounce as the US dollar strengthened against the euro.

“We wouldn’t expect a strong fall from these levels," Resource Capital Research gold analyst Tony Parry said. “Fears are still going to be there supporting gold, but they’re probably not as significant as the past six to 12 months of gold prices would suggest."

For local gold companies, there is a strong appetite to gain exposure to still historically high prices, with a string of promising junior and mid-tier companies aiming to bring new production into the market.

Australia is the third-largest gold producer in the world. It has a 10 per cent slice of global output, with production on the rise.

Domestic producers increased production by 17 per cent in 2010 to 8.5 million ounces of gold, the highest annual output figure since 2003, and valued at $14 billion at current spot prices.

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Yet the real excitement among local junior gold explorers is located far beyond Australian shores in the goldmines of West Africa.

Companies including Gryphon Minerals, Adamus Resources, Ampella Mining and Perseus Mining have all attracted strong interest given their exposure to promising gold belts in countries including Ghana, Ivory Coast and Burkina Faso.

Perth-based
Gryphon Minerals
has excited the market with an inferred gold resource of 2 million ounces at its Banfora gold project in Burkina Faso, with its share price increasing by 140 per cent over the past 12 months.

“Over the next six months we are looking to convert a lot of [the existing resource] into the reserve category," managing director Steve Parsons said.

“Some of these [mines] go down to a kilometre deep, so if you’re finding a couple of million ounces at surface these can really go down a lot deeper as well."

Gryphon says unpublished scoping studies have investigated the potential for a 2.5 million to 3.5 million tonne per year operation.

“That will be producing around 200,000 ounces of gold per year," Mr Parsons said.

In Ghana, Australian junior
Adamus Resources
hit commercial production at its Nzema mine last week, with plans to produce 100,000 ounces of gold during its first full year of operation. Its share price has jumped by 45 per cent in the past year.

Chief executive Mark Connelly said Adamus hoped to produce an additional 100,000 ounces of gold beneath proven oxide ore gold reserves, with the company aiming to produce at cash costs of $US500 an ounce.

“We think there are 2 million to 3 million ounces underneath that oxide, and so far we’ve calculated a resource of about 700,000 ounces just from one pit," he said.

Western Australia-based producer Ampella Mining, which also operates in Burkina Faso, has been another strong performer, with a 20 per cent share price rise in the past 12 months driven by growth in its resource base to 2.2 million ounces of gold earlier this year.

The company is seen as a takeover opportunity with several promising leads within its exploration area likely to push its total resource beyond 3 million ounces by year-end.